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IN THE MORE THAN 35 YEARS SHE has surveyed the investing scene, Susan Byrne has displayed an uncommon ability to identify emerging themes and pick the stocks that would benefit the most from them. For almost 25 of those years, she has been at the helm of Dallas-based Westwood Holdings Group, which now boasts $7.7 billion in assets and the WHG family of funds. Performance in her flagship large-cap value fund is up about 14% this year, and for the past five years it has delivered 16.3% a year on average. We'll let her explain why she now likes software companies and has been reducing exposure to Big Oil.

Barron's:The themes that you have been sounding the past few years -- big U.S. multinationals benefiting from globalization and the emerging world -- have all come to pass.

Byrne: I keep wanting to find the next new thing because I'm afraid that because we were early on many of these industrials and basic-material companies they are probably very overvalued. Then we look at them and they are not. So I'm kind of in a quandary in that sense. We've got 4&frac12;% rates and we are going to be down near 4% in Fed funds and they are at 15-16 times earnings. The larger mega-cap names are trading in line with the overall market, about 16-18 times earnings. Compare that to 1987, when we had about a 10% interest rate and stocks were trading at about 20 times, or 2000, when we had lower rates but P/Es of 25-26. We take our market views and apply various inflation assumptions or interest-rate assumptions and we find we are not in a period of excess.

So the trend continues.

I thought Jim Paulsen [chief investment strategist of Wells Fargo's Wells Capital Management], had a provocative idea in that there could be a renaissance in U.S. manufacturing. People assume that everything we import is sold at Wal-Mart. But a lot of what we import is fabricated manufacturing that is then put together here with more highly skilled workers. It is not so much manufacturing in the traditional sense but the assemblage of different parts that are then shipped from here. What has benefited the market and is still benefiting the market is that these are American-based multinationals that pay taxes, report their earnings and pay their dividends in dollars here, whether their product ever was here or not. And, obviously, the return on invested capital outside the United States is very, very high.

Susan Byrne

From a quality-control standpoint, companies prefer to keep the value-added part of their business here rather than transferring the technology overseas. That affects what might look like a turn-up in manufacturing jobs. Now with the dollar down, it also pays for other companies to be here and be closer to customers and it may also be cheaper for them to make and ship products from here.

You're not concerned about the credit crunch?

There is a lot of debt around. But that debt is not in the major companies. I'm not surprised the market is moving to large-cap growth companies. That is the equity market's way of saying, "We may be in a credit crunch, so I want the companies that can always get the money."

This period of cheap credit went on for so long, let's say five to seven years; there has been a generational bias that credit for everybody is cheap and there has been no penalty for riskier balance sheets. What we are going through right now is an adjustment period and a return to more normal risk perceptions.

In a more normal period where credit counts, the larger, more liquid and more highly ranked companies in the equity market will do better, and the market is rotating that way.

Will the subprime mess lead to a recession?

Right now, we think no, because it appears the policymakers are going to provide for a workout. It could take two years to work out, and the economy could stay slow during that time. But unemployment isn't a particular problem, and for that reason we probably will escape a recession.

I don't think they are in such bad shape. Everybody has credit-card bills, but people are working and they are getting raises and they are cautious. There are going to be people who, say, speculated on condos, who will get hurt on an individual basis. But by and large people are working. This is not an environment where the consumer just falls over dead. Taking money out of houses for little extras is over, but that's not a recession, that's a recession in the housing market.

What about the oil price?

We've been involved in the oil trade for a long time, and we are not overweight oil anymore. We are shifting our emphasis to natural-gas companies. Our big overweight now, and I hesitate to say it because everybody else is saying it too, is in technology. The Russell 1000 index only has 3% or 4% in technology, but we have about 15% or 16% in technology.

Why the shift on energy? Prices are higher than you thought they would be, so do you still think they're heading lower?

I don't really know. I feel very humbled by it. The market appears to be out of whack. The price of oil is over $80 a barrel and gasoline is really not moving, and so that means the integrated oil companies, the refiners, must be getting killed.

Something is amiss. I don't understand it. I'm sensing that in the large-cap integrated oil companies, there may be some earnings disappointments, because they are getting upside-down on refining. There is nothing wrong with them fundamentally. It is a good business. It is a great cash-flow business.

We favor the smaller speciality companies, like
Murphy Oilmur -0.5428226779252111%Murphy Oil Corp.U.S.: NYSEUSD32.98
-0.18-0.5428226779252111%
/Date(1481320921450-0600)/
Volume (Delayed 15m)
:
1466834AFTER HOURSUSD32.98
%
Volume (Delayed 15m)
:
13740
P/E Ratio
N/AMarket Cap
5710151872.52808
Dividend Yield
3.0321406913280775% Rev. per Employee
1526840More quote details and news »murinYour ValueYour ChangeShort position
[ticker: MUR], which will benefit more from its exploration and production activities. Murphy is just bringing on production in Malaysia that they found about six years ago, and it is a huge field.